Morningstar Fund Ratings: Weekly Round-up

ANALYST RATINGS: This week fund analysts reveal new ratings for Ardevora, Candriam and iShares, an upgrade for Mirae and a downgrade for Allianz

Morningstar Analysts 21 March, 2018 | 9:55AM
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New Ratings

Ardevora Global Long Only Equity Bronze

Peter Brunt

Experienced managers Jeremy Lang, William Pattisson, and Ben Fitchew manage the fund with a genuinely unique process that’s steeped in cognitive psychology. Using a clear and well-structured framework, they look to exploit systematic biases exhibited by key players in investment markets.

The portfolio of 150-200 names is equally weighted, which means that giant caps are structurally underweight, but this otherwise results in a high level of diversification. Ardevora as a firm is relatively young and has seen significant growth in recent years.

There has been a higher level of staff turnover than we would like to see, but we note that this is not uncommon in companies experiencing transition phases. Co-manager Gianluca Monaco departed in 2017. While Monaco had good experience and his exit was a loss, we take comfort in the fact that the three remaining managers have all worked on the fund since launch and that additional resources have been added in the form of five analysts.

We find several positive attributes that make this an attractive proposition for investors seeking a truly different approach to global equity investing.

Candriam Bonds Global High YieldBronze

Mara Dobrescu

Philippe Noyard has been in charge of the fund since its launch in 2003 and is supported by a compact team of two other portfolio managers, five analysts, and two quant specialists, all based in Paris. The fund’s bottom-up-driven investment approach results in a high-conviction portfolio, with a high active share relative to the index.

This investment process has largely proved its worth over time, and the fund ranks amongst the category’s best over three, five, and 10 years to the end of February 2018. While the team’s resources are not as numerous and geographically diverse as those of some competitors, the fund has earned our approval.

iShares Edge MSCI Europe Multifactor ETF (IFSE)Bronze

Dimitar Boyadzhiev

The fund offers diversified exposure to four factors that have historically been associated with market-topping performance. Its construction employs a rigid risk management framework that aims to prevent sizeable sector, country and stock bets versus the MSCI Europe Index. The fund’s ongoing charge of 0.45% is also one of the cheapest in the category. While the fund has tracked its benchmark efficiently since inception, its short historical track record limits our conviction to an initial Morningstar Analyst Rating of Bronze.

iShares Edge MSCI World Multifactor ETF (IFSW)Bronze

Dimitar Boyadzhiev

This fund offers diversified exposure to four factors that have historically been associated with market-topping performance. Its construction employs a rigid risk-management framework that aims to prevent sizable sector, country, and stock bets versus the MSCI World Index. The fund’s ongoing charge of 0.50% is also one of the cheapest in its Morningstar Category. While the fund has tracked its benchmark efficiently since inception, its short historical track record limits our conviction to an initial Morningstar Analyst Rating of Bronze.

iShares Edge MSCI World Quality Factor ETF (IWQU)Bronze

Dimitar Boyadzhiev

iShares Edge MSCI World Quality Factor offers exposure to the higher-quality segment of the global developed stock market. The fund’s index screens stocks from the MSCI World and ranks them based on their profitability and financial stability relative to their sector peers. A constituent’s weighting is determined by its quality score and market-capitalisation. The fund employs a solid diversification framework that prevents taking outsize sector, country, and single-security bets.  With an ongoing charge of 0.30%, the fund has a significant cost advantage relative to its average peer in the Global Large-Cap Blend Morningstar Category. However, its limited historical record keeps its Morningstar Analyst Rating at Bronze.

iShares Index Linked Gilt Index - Neutral

Jose Garcia-Zarate

Investors simply looking for a low-cost, expertly managed, and tightly tracking index fund to gain exposure to the market of UK government inflation-protected bonds may find that this index fund meets their expectations.  However, in a broader context, this is a market that is structurally biased to very long maturities. This means that benchmarks measuring the performance of this market, and thus the passive funds tracking them, come with very high duration - typically, well above 20 years.

The fund may do relatively well when duration is a tailwind but should lag in the opposite scenario when pitched against funds in its Morningstar Category with a flexible mandate, able to shorten duration. As a result, we do not have strong enough conviction that this index fund will offer returns above the category average over the long term and thus award it a Morningstar Analyst Rating of Neutral.

UBS ETF Factor MSCI USA QualityBronze

Monika Dutt

The fund provides exposure to high-quality US large caps and mid-caps by selecting stocks with the highest profitability, strongest balance sheets, and most consistent earnings growth from the MSCI USA Index. While we have a positive view of the strategy, its short track record, lack of sector caps, and valuation screens restrain the fund to a Morningstar Analyst Rating of Bronze.

Uni-Global Equities Eurozone Silver

Mathieu Caquineau

Uni-Global Equities Eurozone is the latest addition to Unigestion’s equity fund range. It benefits from the same rigorous and replicable approach that has been so successful on the firm’s flagship European equity fund since 2004. The investment process blends strong quantitative optimisation techniques with fundamental risk assessments to produce a diversified portfolio with low volatility and reduced drawdowns compared with the broad market. The team’s expertise and resources are also impressive. We’ve seen a few departures though in the 2015-17 period. This will bear watching, but we don’t think it questions the firm’s ability to attract talent, as evidenced by recent experienced recruits.

Xtrackers MSCI World Quality ETF Bronze

Dimitar Boyadzhiev

Xtrackers MSCI World Quality ETF offers exposure to the higher-quality segment of the global developed stock market. The fund’s index screens stocks from the MSCI World and ranks them based on their profitability and financial stability relative to their sector peers. A constituent’s weighting is determined by its quality score and market capitalisation. The fund employs a solid diversification framework that prevents taking outsize sector, country, and single-security bets.  With an ongoing charge of 0.25%, the fund has a significant cost advantage relative to its average peer in the Global Large-Cap Blend Morningstar Category. However, its limited historical record keeps its Morningstar Analyst Rating at Bronze.

Upgrades

Mirae Asset Asia Sector LeaderBronze

Mark Laidlaw

We are upgrading the Morningstar Analyst Rating on Mirae Asset Asia Sector Leaders to Bronze from its previous designation of Neutral. Key to our growing conviction is the continued presence of CIO and lead portfolio manager Rahul Chadha. He’s been responsible for building the team and process, both of which compare well against the wider peer group. The investment thesis is centred on the belief that capturing the growing Asian consumer will best deliver long-term sustainable returns in this sector. Whilst primarily bottom-up there are long-term multi-year themes at play – the aspirational consumer, improved healthcare, access to credit and financial security, as well as technology that changes lives. Returns, with the exception of 2016, have been impressive against both peers and the MSCI AC Asia ex Japan index. Mirae has most of the blocks in place and we believe the future is promising, hence justifying our decision to upgrade the strategy.

Downgrades

Allianz Hong Kong EquityNeutral

Claire Liang

While we continue to have a positive view on portfolio manager Christina Chung, we have growing concerns about the viability of her process in the Hong Kong stock market. Chung’s growth investment style with a focus on valuations has yielded strong results in the China equity market but has not been as effective in the Hong Kong investment universe, where such investment ideas are scarcer. As a result, the fund has struggled to deliver for the past few years, and we believe its competitiveness relative to its Hong Kong equity peers has deteriorated.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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